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Household Choices with House Value Misperception

Author

Listed:
  • Stefano Corradin

    (European Central Bank)

  • Carles Vergara-Alert

    (IESE Business School)

  • Jose Fillat

    (Federal Reserve Bank of Boston)

Abstract

Households systematically overvalue or undervalue their houses. We compute house value misperception as the difference between self-reported and market house values. Misperception is sizable, countercyclical, and persistent. We find that a 1 percent increase in house overvaluation results in a 4.56 percent decrease in the share of risky stock holdings for those households that participate in the stock market. We then build a rational inattention model in which households make decisions based on their perceived level of housing wealth. Numerical simulations generate the effects of house value misperception on the portfolio choices that we observe in the data.

Suggested Citation

  • Stefano Corradin & Carles Vergara-Alert & Jose Fillat, 2019. "Household Choices with House Value Misperception," 2019 Meeting Papers 1247, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:1247
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    References listed on IDEAS

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    2. Stefano Corradin & José L. Fillat & Carles Vergara-Alert, 2014. "Optimal Portfolio Choice with Predictability in House Prices and Transaction Costs," The Review of Financial Studies, Society for Financial Studies, vol. 27(3), pages 823-880.
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